Saturday, March 31, 2012

We naturally fear change and transformation, but there is a more sinister source of our chronic stress.

Yesterday I addressed the stress created by the disconnect between official happy-talk and the reality we are experiencing:The Phony "Economic Recovery," Stress and "Losing It". The devolution of the Status Quo is stressful, and we naturally fear this process because what happens next is unknown. As correspondent David P. observes, all change is stressful, even the positive type. But David identifies another source of chronic stress/fear:

Last year you wrote an essay about what you called the "often-wrenching process of change." (Change and the Process of Transformation August 15, 2011). I think there is a marketing/consumerist aspect to our fears. I think the fear of "being yourself" and wanting to retain that fantasy viewpoint is all about the fear that your real self is NOT GOOD ENOUGH.

Most of the country feels this way - not good enough. But we've had help getting there - a million commercials by age 35, lovingly scripted by experts focused on motivating us to consume, often based on improving status or looking better. How could your real self be good enough if you need all those products? Most people are terrified to be stripped of all their things that prop them up, not because they are intrinsically lame people, but because that's how they've been programmed to think. Its very hard to avoid this programming. I mean, really. One MILLION commercials. And I'm certain more time, effort, energy, and creativity went into those commercials than the actual programming - especially given today's reality TV crap. And parents and friends help to reinforce. Its one of the hardest things ever to have a healthy level of detachment from all the stuff.

I once read an almanac (don't ask me why) from the 1950s and in the back, there was this table that I'll never forget. It was a stress table, and it rated each stressful event. Obvious ones like death of a spouse, divorce, getting fired, but JUST AS STRESSFUL were the so-called positive changes - getting promoted, getting married, birth of a child. What I drew from this is that all change (positive OR negative) is inherently stressful. Which ties in completely with what you wrote. Transformation is stressful, even when nominally positive.

Thank you, David, for describing the ontological stress created by the consumerist marketing machine: the more insecure and stressed we are, the easier it is to sell us impulse buying on credit. Debt-serfdom isn't just the result of easy credit: it's the result of marketing aimed at eroding an authentic sense of self and breaking down our rational ability to make coherent plans and stick to them.

I address this process in my new book, which will be available in the Kindle format next week.

Thank you, Mark L. ($10), for your most generous contribution to this site--I am greatly honored by your steadfast support and readership.

Friday, March 30, 2012

Derealization leads to chronic stress, which then disrupts our ability to make rational decisions and follow plans.

We have all experienced the disorientation and "brain freeze" that stress triggers. It seems these symptoms of stress have become normalized in countries where the authorities keep promoting phony "economic recoveries." The disconnect between what the authorities are claiming and what people are actually experiencing is widening, and that leads to stress. No wonder more and more people are "losing it" in public as their neural circuitry melts down under the strain of synthesizing what they experience (austerity) and what they're told (official spin about the "recovery").

In Survival+ I call this process derealization as lived experience is derealized by official spin and propaganda.

Recent research is illuminating how stress disrupts the default hierarchy of the brain. In the absence of stress, the neocortex-rational-mind functions suppress the more primitive subconscious signals of aggression, hunger, sex drive, etc. in order to concentrate our effort to complete some planned activity.

This helps explain the natural "fight or flight" response we feel when suddenly confronted with danger or potential danger, but more importantly it illuminates how we lose the ability to analyze circumstances rationally when we are "stressed out." Once our rational analytic abilities are shut down, we are prone to making a series of ill-informed and rash decisions.

This has the potential to set up a destructive positive feedback loop: the more stressed out we become, the lower the quality of our decision-making, which then generates poor results that then stress us out even more, further degrading our already-impaired rational processes. This feedback loop quickly leads to "losing it completely."

In pondering human development over the past 20,000 years of the transition from hunter-gatherer groups to modern life, it seems self-evident that stress was likely to be resolved in relatively short order in the hunter-gatherer lifestyle: everyone was known to everyone else, conflicts had to be resolved simply because the group survival depended on it, and most threats could be fended off with vigilance, weapons or left behind by a few hours of fast walking.

Contrast the environment that selected for this stress/conscious self-control feedback with modern life: in the modern urban life and work environment, stress is more or less constant and our ability to resolve stressful situations is limited.

This helps explain the increasing prevalence of people "losing it" in public when they encounter a rather typical frustration such as the inability to cash a check at a credit union. Just last week I saw a middle-aged man "lose it" at our local credit union, swearing and raging against employees who were simply following CU guidelines on check cashing. As the finances of many enterprises and households comes under further stress, then self-control degrades and people are more likely to "lose it."

Though this particular article focuses on short-term stress, there is growing body of evidence that chronic stress has a number of subtle and destructive consequences. In addition to the common-sense connection between chronic stress and hypertension, there is evidence that obesity is also related to stress-caused conditions such as inadequate sleep and chronic inflammation. This makes sense as the stress hormones erode the immune system's responsiveness.

Behaviorally, stress breaks down self-control, so it is no surprise that stress leads to bingeing, addictive behavior, impluse buying, etc.--all "knock-on" effects with negative consequences.

Chronic stress permanently degrades our ability to rationally analyze and plan, and so we act irrationally or erratically, as we are no longer able to stick to a conscious plan of coherent action. With the rational mind and self-control centers permanently suppressed, we are prone to "zombie" passivity, "sleepwalking" though life. This may help explain Americans' remarkable passivity as their civil liberties are taken away and their financial insecurity increases.

Many of the features of post-traumatic stress disorder (PTSD) are visible in "everyday Americans," and an understanding of how stress erodes rational thought and self-control helps explain why.

Thursday, March 29, 2012

How to mask yet another Federal Reserve power grab? Call it "consumer protection."

This is truly Orwellian: the latest and greatest Executive Branch/Federal Reserve power grab is labeled "consumer protection." I am indebted to correspondent Jim S. who seems to be one of the few Americans to have actually sorted through this monstronsity and gleaned its true nature: an unprecedented extension of Executive (i.e. Imperial Presidency) and Federal Reserve power.

Let's start by recalling that the Federal Reserve is a consortium of private banks.Calling a private consortium of banks the "Federal Reserve" is the original Orwellian misdirection, for there is nothing "Federal" about the Federal Reserve. It is not a government agency.

Now guess who will fund and control this vast new bureaucracy of "consumer protection"? Yes, the private consortium known as the Federal Reserve. "TheConsumer Financial Protection Bureau (CFPB) will be an independent unit located inside and funded by the United States Federal Reserve. It will write and enforce bank rules, conduct bank examinations, monitor and report on markets, as well as collect and track consumer complaints."

Since managing the money supply and interest rates is the ultimate "consumer protection," we can ask how well the Fed managed those tasks in the past 15 years: alas, their management has been catastrophic for the nation and the middle class, which has been gutted by their policies of serial bubble blowing, leveraged speculation and bank predation.

The very last private consortium any sane person would select to run a Consumer Financial Protection Bureau would be the privately owned parasites of the Federal Reserve. Doesn't the vast, sprawling bureaucracy of the Federal government already have agencies experienced in regulating consumer protection? Why do we "need" to consolidate all financial consumer data and regulation under the control of a non-government consortium that has amply proven itself to be the enabler and enforcer of institutionalized bank predation, embezzlement and fraud?

This is beyond bizarre. If we had to assign the task of protecting consumers to a privately owned consortium, then we'd be better off giving the task to IBM. But the bank-owned toadies in Congress handed all this power to the Federal Reserve. One wonders how it is legal that a private consortium now has power over all financial data in the U.S.

Here is Jim's summary:

You are more than familiar with the Shadow Banking System running parallel, black-box-like to the Federal Reserve System...no regulation, no accounting, notional hypothecation upon notional re-hypothecations accounting for leverages to the Moon, and in the end, essentially infinite debt.

The CFPB represents to me a complete, contained Shadow US Government System established by the Dems and the Fed right under our very noses. One of the profound things I have not completely conveyed is what I see as the invisibility cloak and impenetrable shield the CFPB has for total immunity from evaluation, oversight, attack, etc.
The CFPB is funded by the FED with any amount of money it asks for and is completely unaccountable as to how it uses it...unlimited funding. The CFPB is answerable to no entity regarding its deliberations, decisions with the full force of law, disclosure of agendas.

It will link through its fully unaccountable Director through established Executive Branch inter-agency councils and sub-councils to every agency and sub-agency it desires or any agency wishing to associate/link with the CFPB (e.g.IRS requests Director to have instant nanosecond access for behaviorial data collection on consumers via their formerly private credit card, bank, credit union, stock market and forex market and commodity market accounts....and, Director Cordray says in nanoseconds,....OK!)

Under the opaque umbrella of the CFPB, all Executive Agencies, formerly accountable to the Congress in some way, will become opaque to the Congress insofar as they are associated with the CFPB. Congress can request info from the CFPB, none has to be given at all. The CFPB is an autonomous creature of the Federal Reserve, completely cloaking itself with total immunity from any Congressional controlling authority.

The establishment of a Shadow Government Executive Branch "coup" is a direct follow-up to Paulson's "gun to the head" of Congress in 2008when the world was only hours from a Federal Reserve derivative originated financial crash. Congress capitulated with the initial $700B. and in the meanwhile the Fed has printed debt loans to the tune of $16T to fund the interest liabilities of short term derivative rollover and refinancing demands.

“The CFPB director will have vast rulemaking, supervisory, investigative and enforcement powers and the authority to regulate any person or business that offers or sells a ‘financial product or service,” the Senate Republicans told Obama. “This authority will directly affect every American household by limiting their choices when purchasing financial products, restricting the availability of credit to consumers, and increasing the cost of goods or services purchased using credit.”“Despite the vast power vested in the hands of the director, there are no effective checks on the director’s authority,” said Sen. Richard Shelby, the ranking Republican on Banking Committee.

“When you set up something that is outside the control of the elected branches, when you set up something that doesn’t require the appropriations by Congress to make sure they can continue their work only on the basis of their complying with the constitutional requirements, then you have essentially set up the potential for a rogue agency which does not have any controls and therefore you’re affecting the liberty of the people.”

The Dodd-Frank bill, like Obamacare, is tyranny by complexity. Who can plow through thousands of pages of these bills except those gaming the legislative process to their own advantage?

Consider the Glass-Steagall Act, at 37 pages in length, and the 2,319-page monstrosity of the “Dodd-Frank Wall Street Reform and Consumer Protection Act:" (Source)

Back in December, Nick Schulz helped put the size of the 2,074-page healthcare bill into some historical context by comparing its length to some previous bills that rank among the most consequential in U.S. history, like the 82-page Social Security Act of 1935 and the 74-page Civil Rights Act of 1964.Now that Congress has passed the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” it might be a good time to compare the 2,319-page financial reform bill (245 pages longer than the healthcare bill) to the previous bills listed below (and see graph) that are considered among the most consequential legislative acts for banking and finance.
1. Federal Reserve Act (1913) – 31 pages.
2. Glass-Steagall Act (1933) – 37 pages.

Like everything else, this issue has been put through the partisan meat grinder. Everybody knows the banking sector owns Congress, but how it is even legal to grant extraordinary powers over the entire financial system to a private consortium without congressional oversight? It simply doesn't pass the most basic constitutional "sniff test."

Thanks to Dodd-Frank, it boils down to this: whatever the Federal Reserve does with the data it collects from Federal government agencies is private and none of your business. Whatever financial actions you take that create a digital record is the now the Fed's business.

Wednesday, March 28, 2012

The National Security State has an Orwellian imperative: destroy democracy in order to "save" it.

Here is what I consider to be the dominant narrative of what I call the National Security State. The National Security State is comprised of the Pentagon, the Armed Forces, the CIA, NSA, Homeland Security, the corporate military-industrial complex that profits from it and the "black" budgets, agencies and operations that are hidden from the citizenry in the name of "national security."

Here's the narrative: we were surprised by a treacherous, shadowy, sinister enemy and we have to set aside the niceties of democracy and civil liberties to combat this new and terrible foe. This was the narrative after Japan's attack on Pearl Harbor in December 1941, and it set in motion a total-global-war mobilization of the entire American society and economy.

Civil liberties? Gone, baby: Executive Order 9066 sent 120,000 Americans to concentration camps hastily erected in various wastelands. It was for their own good, and for the good of the war effort, of course; but no questions or legal niceties were allowed. Executive Orders from the Commander in Chief (the President) are like that.

The entire economy and populace were commandeered for the war effort. Since the nation was still in the grip of a decade-long Depression, then borrowing a couple trillion dollars into existance and mobilizing the populace for global war was actually a welcome development to most people.

Since this was a war for national survival and democracy, anything that hindered the war effort (except making a profit, of course) was deemed unpatriotic. The propaganda machine duly cranked out films demonizing our enemies, burying defeats and glorifying victories.

The narrative was repeated in the 1950s once the Soviet Union obtained the nuclear bomb. Once again we were surprised by a treacherous, shadowy, dangerous enemy and we had to set aside the niceties of democracy and civil liberties to combat this new and terrible foe. Communist infiltrators were everywhere, and had to be rooted out. Niceties like civil liberties were tools used by the Commies to mask their heinous efforts to undermine our way of life.

The net result of this narrative was that any self-aggrandizing moron in Congress could slander a decorated and revered general in the U.S. Army (Sen. Joe McCarthy and General George Marshall) and get away with it. Since Commie sympathizers could be anywhere at any time, then domestic spying was necessary, and on a vast scale.

Fortunately, the National Security State had developed the necessary infrastructure for handling espionage and spying on a global scale, so it was a straightforward task to set up a domestic spying operation. If civil liberties had to be trampled to do so, it was necessary to protect the nation and "our way of life."

You see the key point in the narrative: "our way of life" is more important than civil liberties. This is of course an orwellian reversal of what the Founding Fathers had in mind, which was that civil liberties are our way of life.

The narrative that domestic spying was necessary to root out sinister underground bad guys led directly to the COINTELPRO subversion and suppression of Vietnam War-era domestic dissent in the 1960s.

The danger of political activities being lumped in with criminal activity is higher than most complacent Americans believe. It's easy to be naive about the essentially unlimited powers of the National Security State. Most people believe that only "bad people" get caught by the government trawler, but it isn't quite that simple. Anyone perceived as threatening or impeding the State's Imperial ambitions may be targeted. Please don't say that it "can't happen here" because it already happened here.

I was with a friend when the FBI swooped in to arrest him for political crimes against the State, i.e. refusing to support an illegal (undeclared) war. At the time, the FBI had some 10,000 agents tasked with suppressing or disrupting the antiwar movement by whatever means were deemed necessary. Meanwhile, the agency's anti-Mob (organized crime) unit was reduced to minimal staffing. When the State feels its Imperial agenda threatened, then run-of-the-mill criminality gets ignored and the full resources of the State are turned on political resistance to the National Security State.

Having been called into the FBI office myself for grilling (after being threatened along the "we know where you live" line), I can say from experience that the boundaries which are supposed to protect our rights only exist if you can afford high-powered legal representation and if you are able to raise a stink in the "right circles," i.e. within the Power Elites.

The default narrative is to become a repressive Police State with an active secret intelligence program against domestic dissent, i.e. COINTELPRO, the secret campaign to infiltrate, undermine, marginalize and/or subvert the antiwar movement.

The 1976 Church Committee formed to investigate the domestic intelligence campaigns concluded:

"Many of the techniques used would be intolerable in a democratic society even if all of the targets had been involved in violent activity, but COINTELPRO went far beyond that...the Bureau conducted a sophisticated vigilante operation aimed squarely at preventing the exercise of First Amendment rights of speech and association."

Anyone who doesn't believe their government is capable of Police State repression and subversion of First Amendment rights should research COINTELPRO more fully. Nothing will be more threatening to the State than former insiders (those whose belief in the system has faded) turning into whistleblowers on the web. Nothing damages the National Security State more than a truthful accounting of its excesses.

Put simply: the State holds all the hammers, and you know what happens to raised nails.

It is self-evident that the Federal government must retain the means to track and arrest foreign agents of unfriendly governments or groups who are operating on U.S. soil. This is understood. The critical point being made here is that these counter-espionage efforts must comply with the Constitutional limits on government powers and not subvert our civil liberties.

It is an effortless slide for those in power to define domestic dissent as a "threat" that must be subverted, disrupted and suppressed--and limiting the Power Elites from pursuing such over-reach is the entire purpose of the Constitution.

Under the Obama administration, the National Security State has once again staked out the "legal" grounds for total mobilization of the American populace and economy. I invite all supporters of President Obama to carefully read his recent Executive Order entitled (with a truly Orwellian flourish) National Defense Resources Preparedness.

This Executive Order is chockful of extralegal directives and vaguely defined over-reach, of the sort that will be delineated more clearly when the Commander in Chief executes the broad powers laid out in this order.

The president will also be executing democracy and our civil liberties when he invokes this Executive Order. Even the most starry-eyed naive supporter of President Obama cannot read this document as anything but a blueprint for total mobilization and the destruction of the Constitution, democracy and our remaining civil rights.

If this Executive Order doesn't frighten you, then you're in denial.

It's actually very simple: whatever the National Security State does anywhere on Earth is legal. Whatever action you take to protect your civil liberties is illegal.

Tuesday, March 27, 2012

Law-abiding taxpayers are treated like criminals while the criminal class of financiers and State apparatchiks are free to loot and pillage muppets and taxpayers alike.

I recently received quite an education about how law-abiding taxpayers are treated by the state of California via dozens upon dozens of emails detailing how the Golden State ransacked the bank accounts of law-abiding taxpayers in other stateswithout notification or due process, as if the citizens being looted were crafty bankers who'd stolen church funds to live tax-free in an offshore tax haven.

As we all know, crafty (and politically protected) bankers are free to loot churches, muppets and the taxpayers at will while taxpayers are looted by lawless government. Here is a typical account of state thievery. It is anonymous for a good reason: As I noted last week, law-abiding citizens are terrified of their governments, local, state and Federal, as they know that these agencies are literally above the law and will exact retribution on anyone who reveals their tyrannical trashing of due process or who questions their feudal pillaging of oppressed debt-serfs. (I previously addressed this topic in Welcome to the Predatory State of California--Even If You Don't Live ThereMarch 20, 2012)

I received a letter last year that we owed the state of California's Franchise Tax Board $90,000 for taxes in the year 2008.We replied to the Franchise Tax board in a similar manner as RT stating that:
-- Did not reside in California in 2008
-- Did not file a State income tax return in California in 2008
-- Did not have any outstanding tax issues with California in 2008
-- Did no business in California in 2008
-- Owned no property in California in 2008

The CA Franchise Tax board responded by putting a lien on us in the state - fortunately, our banks and assets have no business in CA or I am certain our accounts would have been robbed as well.

After a great deal of uncertainty and angst, I found an accountant in CA who advised us that we needed to file a complete CA tax return for 2008 even though we did not owe any tax. We filed the return and received a response that we owed the state $625 to cover the State's collection fees. We paid the fee and within two weeks received a "refund" check for the $625.

On reflection, we felt as if we had been "held up" by some powerful gangsters and if it had not been for an honest tax accountant we would have suffered much financial damage.

This basic story is repeated thousands of times annually, and while California may hold special status as the most predatory, parasitic, due-process-be-damned state, it's clear that other state and local governments are pursuing similar strategies of lawless looting under the cover of tyrannical statutes approved by elected lackeys of the financial aristocracy.

Is financial tyranny "legal" if some state legislature claims it is legal? Or is all financial tyranny above the law, regardless of what the elected toadies and apparatchiks claim? Would the Supreme Court, another set of lackeys, ever rule that a state cannot steal funds from a private bank account without due process other than a concocted claim that the person might owe the state taxes?

Based on dozens of detailed accounts, I finally figured out how the state of California calculates the tax you owe it.

1. If you ever resided in California or filed a tax return there, even 20 years ago, then any 1099 you receive from anywhere from now until your death is "proof" that you owe tax on that income to California.

2. If you live elsewhere but retain a license to do any kind of business in California, you must be hiding income and therefore you owe substantial taxes to California based on bureaucratic calculations of the average income others with your license earned.

3. If you ever filed a tax return in California, if you stop filing tax returns then you will be targeted and brought to ground as a tax dodger. The only way to escape the lawless wrath of the state's Franchise Tax Board is to keep filing tax returns in California until you die, even if you moved away years ago and earned no income there.

Yes, the mere cessation of filing is "proof" you're hiding income and are a tax dodger whose bank account must be stripped clean. Wells Fargo Bank, a recipient of taxpayer funds in the billions of dollars, deducts $100 or even $150 to do the state's dirty work, and then when it's shown the taxpayer owes the state no taxes, the bank doesn't refund the fee--are you kidding?

The banks and their management are still free to plunder, loot, defraud, pillage, misrepresent risk, assets and liabilities--all backstopped by taxpayer funds. If this isn't the acme of Orwellian reversal, then precisely what is? Taxpayers whose accounts have been looted by the state on the flimsy pretenses listed above must then endure the Kafkaesque torture of pleading with California'a Franchise Tax Board to return the money that was stolen from them without due process.

The Franchise Tax Board tells the powerless taxpayer (let's call him Josef K.) that if he's lucky (and who's lucky when caught in a fearsome web of bureaucracy) his money might trickle back to him in 6 to 8 weeks. The $100 stolen by Wells Fargo-- that's your "penalty" for ever having admitted that you lived in California.

It's like the Hotel California--you can move out any time you like, but you can never leave the tax liability. I am not making this up--I have dozens of detailed accounts of people moving out of California many years ago and having no business or property in the state, yet a 1099 from years past or the mere "failure" to keep filing state returns in perpetuity triggers an unannounced and unexplained raid on their private bank account and/or a lien against any property they own in California.

Then, after much anguish and expense, the trumped-up, totally fabricated, delusional claims of tax liability dissolve and then they begin the bureaucratic nightmare of trying to wrest their money from the rogue state's grasp.

Meanwhile, Federal prosecution of financial fraud has fallen to a 20-year low.Coincidence? No; lack of funding and powerful political protection play roles in protecting the real criminals from any risk. Brown-nosing Republicans have made ceaseless efforts to gut any agencies still clinging to an interest in prosecuting financial crimes, but financial tyranny starts by gutting the statutes themselves so fraud, embezzlement, etc. are no longer crimes.

Not filing a tax return in California even though you moved out of the state 10 years ago, however, is a crime--but as in an Orwellian nightmare, the "law" isn't written down, it is embedded in some bureaucratic rules that are hidden from the taxpaying citizens. It isn't "legal," but since due process has been abolished, who cares what's legal or illegal?

It's actually very simple: whatever the state or Federal government does to you, that's legal. Whatever action you take to protect your rights is illegal.

Monday, March 26, 2012

This Congress and President Obama have shredded the Bill of Rights. We have one last chance to restore the Founding Fathers' bastion against a rogue Central State: the Bill of Rights.

"Everything that Richard Nixon did to me, for which he faced impeachment and prosecution, which led to his resignation, is now legal under the Patriot Act, the Foreign Intelligence Surveillance Act, and the National Defense Authorization Act (NDAA)." Daniel Ellsberg. Can Congress legalize tyranny by passing a law that says it can? Can Congress shred the Bill of Rights by passing a law that says it can? Well, Congress has passed such a law, and President Obama--the most effective Trojan Horse president in American history, a plutocrat dressed as a "progressive"-- rushed to sign it on New Years Eve 2011 when nobody was looking.

He signed it. We'll fight it. President Obama signed the National Defense Authorization Act (NDAA) into law. It contains a sweeping worldwide indefinite detention provision. The dangerous new law can be used by this and future presidents to militarily detain people captured far from any battlefield. He signed it. Now, we have to fight it wherever we can and for as long as it takes.

The problem that all the congressional supporters of the NDAA don't seem to get is that the difference between a dissenter and a "belligerent" is in the eye of the beholder. This is why the Founding Fathers guaranteed civil liberties against the power of the Central State. Now those guarantees have been overthrown by the pursuit of endless war against an ill-defined threat by a congressional act that no military or law-enforcement agency requested: this is 100% politico-instigated.

We have one last chance to restore at least a part of the Bill of Rights. Some members of Congress awakened from their fund-raising somnambulance and proposed the Due Process Guarantee Act which would restore the Bill of Rights to its proper place in US law.

So do one thing today for the nation and its liberties: contact your representative and senators to press them to support this bill. Ask them which military or law enforcement agencies requested that Congress nullify the Bill of Rights with the NDAA. Advise them to do the correct thing for once in their sordid little careers and vote for the Due Process Guarantee Act.

The only presidential candidate who has vowed to axe the NDAA provisions is Ron Paul. If you support any other candidate, ask why they are supporting the gutting of the Bill of Rights under the Orwellian umbrella of GWOT (global war on terror).

Saturday, March 24, 2012

The assumption that lower home prices improves the affordability of houses ignores two critical inputs: interest rates and income.

That the U.S. housing market is still in a post-bubble slump is no secret, as revealed by this chart courtesy of streettalklive.com: note that despite unprecedented intervention, including the complete socialization of the U.S. mortgage market (99% of all mortgages are guaranteed by the Federal government) and the socialization of subprime market for poor credit risks (3% down and easy credit from FHA), this chart punctures the happy-talk illusions of a rebound in housing.

Credit-asset class bubbles cannot be reinflated because they follow an S-curve. No matter how much taxpayer money the Federal government throws into the housing market, it will not reinflate. The financialization (credit/leverage bubble) of housing follows an S-curve as a system, and tweaking the parameters of the inputs (lowering interest rates, buying up toxic mortgages, etc.) doesn't change the curve.

Hubris-soaked central Planners are incapable of understanding that their numerous policy interventions have essentially zero impact on the curve. But if you can't believe systems don't respond to frantic policy measures, then consider these factors:

1. Tens of millions of households are too poor to buy a home (the FDIC calculated 40% of the U.S. households have insufficient income and credit to buy a home) without massive subsidies, and with no skin in the game their purchase is basically a lease with an option to sell later for a private gain at the expense of the government.

if it doesn't work out then it's last one on, first one off: they default with little loss and possibly much to gain, i.e. two years living rent-free in a not-yet foreclosed house.

2. Tens of millions of other households are drowning in underwater mortgages they can afford to pay (barely) but that have crippled their net worth and borrowing power. They are out of the housing market except as potential defaulters.

3. Millions of other credit-worthy buyers have woken up to the fact that buying a house is a form of consumption and a risky "forced savings" investment, as property taxes spiral ever higher and prices continue sagging in many markets. The risk is high and the potential gain is uncertain.

Those snapping up housing for cash are either buying to rent the homes or to speculate that a resurgent housing market will arise and they can "flip" for big profits. This segment simply isn't large enough to soak up all the millions of homes languishing in the "shadow inventory" of homes being held off the market in the vain hope prices will bubble higher.

The general idea of lower home prices is that once prices fall to some magic threshold, buyers will jump in and liquidate the inventory. That notion makes two enormous assumptions:

--Interest rates will stay near-zero when inflation is factored in

--Household income will stop declining.

In other words, there are three inputs to housing affordability, and price is only one of them. Interest rates and disposable income are equally important. Note that income in all quintiles (the entire spectrum of income--high, middle and low) has been declining since the housing bubble topped in 2007:

Official inflation has been running at around 3% a year, and many other measures suggest that number grossly understates reality by gaming the percentages of various inputs.

But taking the official 3% as a reasonable approximation, then buyers of 4% 30-year mortgages are earning a wafer-thin 1% in real return (4% - 3% = 1%) and they are taking a stupendous risk that inflation will remain well under 4% for the next three decades. Any surge in inflation and rates would destroy much of the value of their investment.

Let's take two examples. Let's say a house that sold for $400,000 at the top of the bubble is now selling for $250,000, $50,000 down (20%) with a $200,000 mortgage at 4%. let's say the household earns $50,000, so the mortgage is exactly four times gross income. The interest on the mortgage is $8,000 annually (principal, property taxes, insurance etc. are added to make up the total mortgage payment).

Now let's say the house declines in price to $225,000, so the down payment drops to $45,000 and the mortgage is $180,000. But let's say investors are now demanding 3% above nominal inflation and mortgage rates are now at the historically moderate level of 6%. Meanwhile, the household income has slipped to $45,000 annually as bonuses and hours are trimmed and workers transition to lower paid positions.

The ratio of income to mortgage is still 4-to-1, but the annual interest payment is now $10,800, $2,800 higher--a 35% increase. By any measure, the house is less affordable despite declining $25,000 in price.

This is how affordability can decline even as home prices continue to slide.

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Friday, March 23, 2012

Massive Federal deficits require higher taxes; ever-expanding public debt and higher debt service sets up a death spiral once new investment is crowded out by Federal borrowing.

In only three more years you're talking $20 trillion in public debt for the USA and a GDP going nowhere fast. And what does that look like in terms of the S&P 500?Courtesy of frequent contributor Chartist Friend from Pittsburgh, here is the SPX charted against total public debt. You'll notice it's crashing:

What this chart reflects is another aspect of the death spiral I described yesterday in The One Chart That Says It All: when depreciation outstrips new investment, then productivity, income and profit all decline. As interest on skyrocketing debt rises, then more income must be diverted to service debt, leaving less for new investment. That sets up a positive feedback loop, i.e. death spiral.

Here's how rising Federal debt creates a death spiral in the economy. As Federal debt skyrockets, the cost of debt service rises, even at super-low rates of interest. That means taxes must rise, because no constituency will allow its share of the Federal budget to decline by more than a symbolic amount. Higher taxes means there will be less money available for new investment, and the enormous sums of Federal debt that have to be sold crowds out other investment.

Interest rates have been manipulated lower for a few years via the Fed buying Treasuries with freshly printed money and a perceived "flight to safety," but eventually the Treasury will have to compete for investors' cash, and rates will rise.

The Federal government already borrows more per year than most country's gross national product: about $1.5 trillion a year. You can look it up here: Public Debt of the U.S. That's roughly 10% of the U.S. GDP, added to public debt each and every year.

Public debt on March 21, 2008, four years ago, was $9.39 trillion. Today it is $15.57 trillion. The difference is $6.18 trillion. Divide by four and voila, $1.5 trillion has been added to the debt annually.

Ignoring the politicos' shuck and jive about "balancing the budget" as tiresome political theater, let's multiply 3 X $1.5 trillion = $4.5 trillion, and add that to $15.57 trillion: in three years, Public Debt will top $20 trillion, on the way to $30 trillion.

In constant (2005) dollars, the economy actually shrank in the three year span of 2008-2010 and is back to 2007 levels. That's what we bought with $6.1 trillion in additional debt and Federal spending.

Just as a refresher:

Federal revenues

2007 $2.56 trillion
2010 $2.16 trillion

Federal spending

2007 $2.72 trillion
2010 $3.72 trillion

In three years, Federal spending jumped almost exactly $1 trillion, or 36.7%.

In 2011, the Federal deficit is 11% of the nation's GDP.

In 2011, the Federal government borrowed 42% of its expenditures.

As the recession ended in mid-2009, we're almost three years into a "recovery."

Over 40% of Federal spending is Social Security and Medicare/Medicaid. With Baby Boomers retiring en masse, 2 million new beneficiaries are added every year:Social Security system (Wikipedia). Add in Defense spending and roughly 2/3 of the Federal budget is politically untouchable. Then add in 11% debt payments. There is little room to move here politically, as every program of any size is a "sacred cow" or "third rail."

A program that routinely pays $20,000 a year to higher-income recipients and collects $700-$1,000 a year in income from tens of millions of workers who are in line for benefits is not sustainable. If we factor in the low Social Security taxes being paid into the system by low-income workers, then the ratio drops to about 2 workers for every beneficiary.

The demographics are not encouraging.

Taxes of all sorts will have to rise. Cuts will be symbolic because the political pain will be unbearable. Most observers note that increased taxes lowers consumption and that will hurt the economy, but lower consumption is the least of our problems. The real problem is there is no end in sight to skyrocketing public debt and interest on that debt, and that double-whammy of higher taxes and competition for scarce investor cash will erode the capital available for productive new investment.

Without productive new investment, then debt service soon outstrips income growth and the economy enters a death spiral of declining productive investment, ever expanding debt and ever higher debt service costs.

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Thursday, March 22, 2012

Depending on debt to fuel nominal growth leads to an economic death spiral.

Sometimes one chart says it all. Here is a chart of the S&P 500 (a broadly based measure of the U.S. stock market) in a ratio with total consumer credit, courtesy of frequent contributor Chartist Friend from Pittsburgh.

Charted against consumer credit, the S&P 500 (SPX) collapsed after the 2000 dot-com bubble burst and has been tracing out a descending channel since then.

Chartist Friend explains:

A funny thing happens when you price the stock market in something other than itself, say gold or the PPI or in this case Total Consumer Credit Outstanding. You wind up with a depiction of the market that is sometimes very different from the headline-nominal performance number. The following chart shows that in the 80's and 90's we had a real bull market, one based on production and innovation that was able to outperform the growth of credit in the economy. Excessive borrowing wasn't needed during that time. Now we're borrowing like a drunken shopper, and all we can come up with are centrally planned consumer-oriented bubbles.

What we see very clearly in this chart is the dramatic spikes created by credit bubbles--the housing bubble in 2001-2007--and massive Central Planning intervention: The Federal Reserve's expansion of money supply and constant injections of liquidity into markets and the Federal government's $6 trillion bailout/stimulus debt binge since 2008.

The critical feature of each credit bubble is that the SPX responds with less vigor to each dose of credit. This is the classic downtrend--lower highs, lower lows.

This is the chart of a death spiral. Here is one way to understand the dynamics revealed in this chart: when depreciation of productive assets (factory tools, software, refineries, etc.) outstrips new investment in productive assets, then output, income and profit decline. (Note that building McMansions in the middle of fields and pumping hundreds of billions of dollars into overseas adventures are not productive investments, they are mal-investments.)

Once the cost of servicing all that new debt outstrips increases in income, then there is less money available for productive investment. Debt service and mal-investment thus set up a positive feedback loop, a.k.a. a death spiral.

The housing bubble created over $5 trillion in new debt to service while it produced effectively zero new productive investment (housing is ultimately a form of consumption).

The Fed's injections of liquidity via trillion-dollar purchases of toxic mortgages and Treasury bonds does not funnel money into productive investments--all it accomplished was to further incentivize speculative churning and financialization to enriched the few at the expense of the many.

So sit back, tighten your seatbelts and enjoy the death spiral ride, brought to you by the Federal Reserve and your elected servants of the financial Elite. Now that the latest credit bubble is popping, the market will roll over and continue tracing out the down-channel until it hits zero: the next credit bubble won't spark a rally at all, it will simply spark implosion.

For more on the dynamics of financial fraud and credit bubbles, please check out:

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